Welcome to the website of the Digital Media Law Project. The DMLP was a project of the Berkman Klein Center for Internet & Society from 2007 to 2014. Due to popular demand the Berkman Klein Center is keeping the website online, but please note that the website and its contents are no longer being updated. Please check any information you find here for accuracy and completeness.

Your business name may not be the same as, or deceptively
similar to, other corporate names on file with the Secretary of State
(limited exceptions apply). Additionally, the name may not contain the
words "bank," " trust," "trustee," or related words.

2. Recruit and/or appoint a director or directors for the corporation.

Under California law, a corporation must have at least
three directors, unless there are less than three shareholders. In that
case, the number of directors may be equal to or greater than the
number of shareholders. For example, if the corporation has only one
shareholder, the number of directors may be one or two. If the
corporation has two shareholders, the number of directors may be two
(or three, which is the normal minimum).

California does not set forth a minimum age or residency requirement for directors.

Either the articles of incorporation or the corporation's
bylaws must state the number of directors that will constitute the
corporation's board of directors.

3. Prepare and file articles of incorporation with the Secretary of State.

California law requires a corporation to create bylaws.
There is no set criteria for the content of bylaws, but they typically
set forth internal rules and procedures for the corporation, touching
on issues like the existence and responsibilities of corporate offices,
the size of the board of directors and the manner and term of their
election, how and when board and shareholder meetings will be held, who
may call meetings, and how the board of directors will function. You
are not required to file bylaws with the Secretary of State, but the
corporation must keep a copy at its principal place a business. For
general information on corporate bylaws, please see the Bylaws page.

5. File a Statement of Information with the Secretary of State.

The filing fee is $25. The Secretary of State's website has a simple, fill-in-the-blank form
for the Statement of Information. Instructions are included. It must be
filed within 90 days of filing the articles of incorporation.

See the general section on Forming a Corporation for details. You can find the California statute relating to issuance of stock certificates at Cal. Corp. Code § 416.
Unless the articles of incorporation state otherwise, the board of
directors has the authority to set the "consideration" (i.e., the
amount to be received) for each share of stock.

8. Determine what tax and other regulatory obligations the corporation has, and take care of any necessary registrations.

Request an Employer Identification Number (EIN) from the IRS. This can be done via its online application. There is no filing fee.

If you will be paying at least $100 to an employee or
employees in a quarter (this includes corporate officers), you are
subject to California employment taxes and must register for a
California employer account number within 15 days of paying that $100.
You can register for employment taxes and get your account number
online using the Employment Development Department's website. These taxes must be paid quarterly. For more information on being an employer, including tax information, see the California Employer's Guide.

California imposes an $800 minimum franchise tax on
corporations doing business in the state. This minimum tax is separate
from any income, self-employment, or payroll tax. For many, this $800
minimum tax could be a significant impediment to forming a corporation
in California, especially if you have little or no expected income from
your online publishing activities.

California's current income tax rate for corporations is 8.84%.

9. Open a bank account for your business.

It is a good idea to keep your business's finances
separate from your personal accounts. A good way to do this early on is
by opening a bank account for your corporation. You will probably need
a Tax ID number (EIN), a copy of the articles of incorporation, and a
resolution identifying authorized signers if those names are not listed
in the articles. Here is one example of the documentation that banks ask for.

Other Notable Requirements for Maintaining a Corporation in California

Cal. Corp. Code § 1501
(scroll down) states that a corporation must send an annual report to
shareholders within 120 days of the end of its fiscal year. This
requirement does not apply, however, if the corporation has less than
100 shareholders and its bylaws expressly waive this requirement.

An S corporation has the same basic organizational structure as a regular corporation, but some of the tax advantages of a partnership or LLC.
An S corporation pays no federal income tax, except for tax on certain
capital gains and passive income. Instead, the corporation's profits
and losses "pass through" to shareholders, and profits are taxed at
individual rates on each shareholder's Form 1040. Certain requirements
and additional obligations apply -- please see the S Corporation page for details.

To form an S corporation, designate "S" status with IRS via Form 2553
within 2 months and 15 days of filing your articles of incorporation
with California. There is no additional paperwork that you need to file
with California.

California does not recognize "S" status in the same way the
IRS does. California taxes the corporate profits of an S corporation
before distribution to shareholders at a rate of 1.5% (as opposed to
8.84% for C corporations).

While the corporate tax rate for S corporations is lower
than that for C corporations, the $800 minimum franchise tax still
applies.

California law has provisions relating to what is known as a
"close corporation" -- a classification for a corporation with a small
number of shareholders (thirty-five maximum) that does not issue stock
to the general public. In general, running a close corporation permits
a less formal management style under the auspices of a shareholders'
agreement. Please see the Close Corporation page for details.

The articles of incorporation of a close corporation are
different from ordinary articles of incorporation. The Secretary of
State's website has a sample articles of incorporation for a close corporation. Among other things, close corporation articles must contain:

a statement that all the corporation's issued shares of
all classes shall be held by not more than a specified number of
persons, not exceeding thirty-five; and

this statement: "This corporation is a close corporation."

Running a close corporation generally requires a shareholders'
agreement. This is an agreement among all the corporation's
shareholders, in which they agree to the relaxation of various
corporate formalities, such as holding frequent shareholder and board
meetings. If you are interested in forming a close corporation, you
should contact a lawyer.

Additional Steps and Information about Forming a Special/Public Purpose Corporation

California law allows for the creation of two special corporate forms for organizations intending to serve some public benefit, beyond purely seeking profits. The two forms are known as the "flexible purpose corporation" and the "benefit corporation." Under either form, the corporation pursues some additional goal—such as environmental responsibility, or general social benefit—beyond the traditional profit-seeking of a corporation. The directors of the corporations are then immune from liability based on their pursuit of these other goals. This .pdf document explains the basics of these two forms.

The "flexible purpose" corporation, created by the Corporate Flexibility Act of 2011 and governed by the California Corporations Code, Division 1.5 (Chapters 1-11, Sections 2500-3503), allows a corporation to specify certain special purposes. The director(s) of a flexible corporation then pursue these special purposes in addition to the traditional profit motive, and are immunized from liability for pursuing the special purposes. See Section 2700(c)-(d). Section 2602 specifies the available special purposes, but in summary:

the articles of incorporation must state either that the corporation is committed to a specific purpose, or to engaging in a specific profession (Section 2602(b)(1)); and,

the articles must also specify at least one from a list of additional goals, which include environmental responsibility, community/societal benefit, or any purpose that a nonprofit corporation may pursue.

The Corporate Flexibility Act also contains specific requirements for reporting to shareholders (Sections 3500-3503), and specifies methods through which corporations may convert to and from a flexible purpose corporation (Sections 3300-3305).

The "benefit" corporation, governed by California Corporations Code, Division 3, Part 13 (Chapters 1-4, Sections 14600-14631), has "the purpose of creating a general public benefit." Section 14601(c) of the law defines "general public benefit" as having "a material positive impact on society and the environment," and specifies the method by which this standard should be judged.

In addition to the traditional profit goal of a corporation, the directors of a benefit corporation must also take into account "community and societal considerations," environmental effects, and other particular factors. Section 14620(b)(1-7).

Directors are immunized from liability if they properly take into account all of these factors. Section 14620(g). Directors are further immune from claims that the benefit corporation has failed to actually create a public benefit. Section 14620(f).

If you wish, you may specify additional public benefits that your benefit corporation will pursue. The list of permissible specific benefits, enumerated at Section 14601(e), includes "any other particular benefit for society or the environment." These specific benefits then become binding on the directors as well. Section 14620(b)(7).

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Disclaimer

Information in this guide is based on general principles of law and is intended for information purposes only; we make no claim as to the comprehensiveness or accuracy of the information. It is not offered for the purpose of providing individualized legal advice. Use of this guide does not create an attorney-client or any other relationship between the user and the Digital Media Law Project or the Berkman Center for Internet & Society.

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